Chart of Accounts: The Buckets Everything Lands In
Every transaction in your books is assigned to an account, and those accounts are what your P&L and balance sheet are built from. Get the chart right and your reports answer real questions. Get it wrong and you have a very tidy list of numbers that tells you nothing.
What the Chart of Accounts Is
The chart of accounts is the list of categories your business uses — every account has a code, a name, and a type. When you categorize a bank transaction, you are choosing which of these accounts it belongs to.
It is worth understanding because it is the one setup decision that shows up in every report you will ever run. Your P&L is not a separate thing you configure — it is your chart of accounts, summed.
The Six Account Types
Every account is one of six types, and the type is what decides which report the account appears on and where.
Asset
What the business owns: bank accounts, money owed to you, equipment. Balance sheet.
Liability
What the business owes: credit cards, loans, unpaid bills, sales tax collected. Balance sheet.
Equity
What is left for the owners: contributions, draws, retained earnings. Balance sheet.
Revenue
What the business earns. P&L.
COGS
Cost of goods sold — what it cost to deliver what you sold. P&L, above the gross profit line. See the next section.
Expense
Everything else it costs to run the business. P&L, below gross profit.
Why COGS Is Not Just an Expense
COGS is debit-normal and behaves exactly like an expense, so it is fair to ask why it gets its own type at all. The answer is the shape of the P&L:
Revenue − COGS = Gross Profit
Gross Profit − Expense + Other Income = Net Income
Gross profit is the number that tells you whether the thing you sell makes money before the cost of running the company. A bakery whose flour, butter and packaging sit in COGS can see its margin per loaf. The same bakery with all of it lumped into Expense sees one profit figure and cannot tell a pricing problem from a rent problem.
The practical test: would this cost still exist if I sold nothing this month? Rent, software and insurance would — those are Expense. Materials, inventory and the contractor you hire per project would not — those are COGS.
Importing a Chart by CSV
If the business already has a chart of accounts elsewhere, import it rather than retyping it. The CSV needs a header row and at least one data row, with these columns:
- code — required. The account number.
- name — required. What it is called.
- type — required. One of Asset, Liability, Equity, Revenue, Expense or COGS.
- category — optional. A finer grouping within the type. Leave it out and a sensible default for the type is used.
This is also the moment to prune. An imported chart is often years of accumulated one-offs; importing all of it carries the mess across.
Where to Find It
- Business owners: Banking → Accounts.
- Tax professionals: open the client, then Bookkeeping → Chart of Accounts.
How Many Accounts You Actually Need
Fewer than you think. The instinct is to create an account for every kind of spending, and it makes categorizing slower without making reports better — nobody makes a decision differently because pens and printer paper were tracked separately.
A useful rule: create an account when you would act on the number. If you would renegotiate a contract, cut a line, or raise a price based on seeing that total by itself, it earns its own account. Otherwise it belongs in a broader one.
The one exception is anything with its own tax treatment — meals, vehicle costs, home office. Those want separate accounts regardless of size, because they are handled differently on the return and lumping them in creates work at filing time.
Frequently Asked Questions
Can I change an account's type later?
Treat the type as a decision to get right up front. The type determines which report the account lands on and on which side of gross profit, so changing it moves every historical transaction in that account too — which is exactly what you want if it was miscategorized, and a surprise if it was not.
Do I need account codes if I do not use numbers?
The code is required on import. The convention most charts follow is to number by type — assets in the 1000s, liabilities 2000s, equity 3000s, revenue 4000s, COGS 5000s, expenses 6000s — which keeps accounts sorted in report order automatically.
Should I split every expense out for tax purposes?
Split what the return treats differently, and only that. Your accountant maps accounts to tax lines at filing time, and a chart with fifty near-identical expense accounts makes that harder, not easier.
What happens to accounts I stop using?
Leave them. An account with history in it is holding real transactions; removing it from the chart does not remove them from your books, and prior-year reports still need it.